I'm Lead Analyst at European Energy Review and consultant to a number of governments & institutional investors, most recently as Senior Research Fellow, Netherlands Institute for International Relations (Clingendael), I was previously Senior Research Fellow at ETH Zurich working on energy and political risk. I started work in the City of London, advising on energy markets and political risk, as Senior Energy Analyst at Datamonitor for leading global utilities, and headed up the Global Issues Desk at Control Risks Group, specializing in political risk, geopolitics and security analysis for multinational companies, governments and institutional investors. I was also seconded to work in Washington, D.C., to enhance CRG's political risk offerings in North America, having previously worked as an energy consultant at Weber Shandwick Worldwide. My initial stomping ground was British Parliament, serving as Policy Director to the largest All Party Parliamentary Group. Contact m.n.hulbert.03@cantab.net

Nexen Deal: Why North America Is The New Middle East

The slight problem with North America calling itself the ‘New Middle East’, is that overseas investors will treat it as such. Cue China. The latest $15.1bn offer for Canadian based Nexen, at a whopping 61% premium over its share price, follows a long line of Chinese resource investment in North America. CNOOC has form, holding a stake in MEG Energy and outright ownership of Opti Canada. Its Chinese partner in resource acquisition, Sinopec, has just snapped up international stakes in Talisman, having acquired Addax Petroleum in 2009. The ambitious Chinese outfit holds stakes in Syncrude and Devon Energy, with bids on the table for Daylight Energy – not to mention a white knight bid to help Chesapeake out of a deep shale gas hole. To complete the set, PetroChina has sunk $4bn into Canadian oil sands and British Columbia gas plays. China has even pumped $17bn into American markets since 2010 to keep the donkeys nodding. You get the picture: ‘Seven Sisters’ has become ‘Three Chinese Brothers’ as far as North America is concerned.

But it’s not just in the US and Canada where Beijing has been strutting its stuff in the Americas. They are serious players in Venezuela, Bolivia and Colombia, not to mention Brazil, where China is set to be one of the biggest overseas investors in pre-salt developments. It’s already extended $10bn cash for oil loans to Brasilia, while Sinopec took large stakes in Galp Energia in 2011. Sinopec swept up Repsol’s Brazilian holdings for $7.1bn in 2010, alongside Sinochem’s purchase of the Peregrino oil field from Statoil. It was no coincidence that Premier Wen Jiabao dropped in on Argentina in June 2012 with a view to plugging Ms. Kirchner’s hydrocarbon gaps. The list could go on (and on), but it’s the overall strategic point that needs to be made: China sees the Americas as a vital place to do business to grow (and hedge) its stake in the global energy game.

Making big ticket investments in Canada will make Washington DC look very stupid if they keep erecting protectionist barriers of course, especially when you consider the enormous reserves America now sits on. But when you strip out all the hype around on Chinese resource strategies, you get three underlying aims: Reducing price risk exposure, security of supply and diversity (of transit) and source of energy. That can be seen in Central Asia, Africa and Australasia, albeit with some more extreme markets being put into the mix along the way. Beijing is now better placed than any other consumer to maximise its arbitrage potential across producer states, especially because it’s deadly serious about developing its own unconventional resources as well. Ask anyone working for Gazprom – the Russian gas giant has been trying to sell gas into Eastern China for years. If Russia wants access to the Chinese market it’s going to be on Beijing’s terms.

But it’s the Middle East – the epicentre of global energy production – where China is most keen to avoid a long term dependency trap. China knows that OPEC supplies are the only credible way demand can be met over the next twenty years, but it’s aware that MENA domestic consumption is growing fast, while unconventional resources have doubled the global resource base over the past decade. That could end up being five times larger than conventional supplies; if nothing else, the 8 to 10 ratio of 80% of oil and gas sitting in OPEC and Russia with 10% in OECD states and 10% in China has been smashed. But while we’re busy working out what this new energy order might look like, China is actually doing it, actively rebuilding and reshaping the contours of the international energy system. Cue North America, the self-proclaimed ‘new Middle East’.

Prolific Chinese investment in Washington’s backyard not only offers Beijing a tactical hydrocarbon hedge against traditional petro-states as dependency ratios explode in the East, it has a serious strategic angle given US energy independence might start looking a more credible prospect in the next twenty years. Assuming the US finally matches its energy rhetoric with political practice, China would have the mother of all ‘swap agreements’ to put on the table. Beijing would concede all its assets across the Americas with West Africa put into the mix, helping to ease the US out of its historic energy ‘global guarantor’ role. In return, the US would cede the Middle East, Caspian, East Africa and Australasia as a pure play Chinese energy concern. You’d basically split the world in two using the mid-Atlantic ridge as a proxy border.

The more likely (and indeed constructive) outcome is that things are never made that clear cut. Rather than leaving some of the core energy producing regions to geopolitical chance, everyone’s interests are far better served by sharing the geopolitical costs of energy transition to the East between the US and China, by continually bringing Beijing into the global energy fold. On-going Chinese investment across the Americas is the perfect way of ensuring Western oil keeps flowing East, promoting oil and gas as globally traded and fungible goods. Not commodities that need to be fiercely fought over for chimerical gains. Letting North America become a Chinese lake is the way of the future: it also puts a new spin on the ‘Chimerican’ relationship, and not one that involves tonnes of debt and even more credit. North America as ‘The New Middle East’? You betya…

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That’s an ironically interesting point; I’ve just drafted the ‘Globalizing Natural Gas’ chapter for the Global Energy Handbook (Wiley Blackwell) where we end on the idea that China could be more likely than the US to be sending ‘LNG freedom tankers’ across the waves….

Mostly depends on domestic shale plays in China – I’d say watch that space, but could be enormous.

It is demand by the growing economies of India and China that will pressure the world’s oil supply and demand balance over the long term. This is in sharp contrast to moderating demand by the world’s advanced economies. China’s insatiable thirst for growing volumes of oil has led it to pay a premium for Nexen to ensure its future energy security, particularly since natural declines in the production rate of conventional oil means that nearly $10 trillion will have to be spent to replace the 47 million BOPD required as shown here:

Good point on Colombia, one of the shining lights / hopes of Lat American production. I’m not sure China really about depleting anything, merely meeting demand that the world still desperately wants and needs. Lets not forget we’ve already had our industrial revolutions (welcome to the global climate debate)…

Thanks for the comment. You’re right, climate change doesn’t come into the analysis here. My broad take (beyond the obvious that it’s credible) is that we’ll go from a world of mitigation (or attempted mitigation) to adaptation arouns 2020 or so. It’s what made all the green movements analysis of Durban so ridiculous – glass half full, nope, totally cracked. That being so, I suspect the idea that we have carbon lock to ensure the underlying value of hydrocarabon revises will never be monetised isn’t going to play out – it has been noted as an argument ‘we only have a few years of reserves left’ precisely for that reason. If that was really the case, you’d need to price carbon out of the market – and as we’ve seen from the EU ETS – we’re clearly politically not at the stage to do that – and that’s before the cost implications would really become apparent for consumers to make such a transition. In fact, EU ETS has become dangerous in its own right in that it has ended up incentivising coal burn in Europe with a bit of woodchip (biomass) chucked in. Not quite the ticket.

Ironically all the cheap gas of late has ruined all the cost curve expectations for renewables to reach cost parity without years of government support anyway (save China perhaps). By the same token, the notion gas is going to be a bridging fuel to a lower carbon future is ok, but with those sunk costs, I’d say gas is more like a permanent architectural feature of the energy landscape. It has however clipped US emmissions by around 450million tonnes over the past five years (coal to gas switch)

So climate to be taken seriously, but it’s still a subplot on the global energy scene I’m afraid – it really is a case of making sure you price in externalities properly, otherwise the market doesn’t care – and if you get it wrong, well, as seen with EU ETS – law of unintended consequences..

p.s. Monk – it’s a colloquialism anyway, so I hereby proclaim betya as now slang! :)